The Magnitude Of Long Term Profits In A Gold Secular Cycle

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When we put the two together, by 1974 an investor in gold would have had 288% (100% + 188%) of the purchasing power of the money they started with in 1969. On an inflation-adjusted price basis (not including dividends) an investor in the S&P 500 would have had 63% (100% - 37%) of the purchasing power they started with. So, if an investor had chosen to be in gold instead of stocks over the five years, they would end up with 4.57X the assets in 1974 that they would have had on a price basis if they had chosen stocks instead (288% / 63% = 457%), as shown with the yellow bar for 1974 above.

That magnitude of an almost 5X difference in ending net worth, over a period of just five years is a life changing difference, particularly for someone in retirement or on the verge of retirement. This is the cumulative power of the contracyclical cycles, and a saver having almost five times the net worth as a result of being in the correct asset for the cycle in a time of economic distress and rising inflation was the actual historical result.

Over the course of the secular cycle, the rolling two-year advantage was not 100% (reality rarely is), but it was highly consistent overall, with 109 of the 137 monthly rolling two year advantages favoring gold over stocks, and only 28 favoring stocks over gold (this is measured by monthly averages rather than annual). So, over the secular cycle, if someone had owned gold rather than stocks in any given month, then 80% of the time they would have better off two years later.

When we look at magnitude, then the 109 rolling two-year advantages to gold built up on top of each other, albeit being partially offset by 28 two year advantages to stock going the other direction. In combination, as shown by the height of the gold bars, on a price basis starting from 1969, an investor in gold would have had been 2.1X better off than a stock investor by in four years, 4.5X in six years, 3.6X in eight years, and 12.3X better off in eleven years.

What the historical record of the contracyclical relationship between gold and stocks shows is that combination of consistency and magnitude were indeed of life changing significance when measured using average results over long term periods.

The 1980 To 2000 Cycle: Stocks Over Gold

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However, when the cycle changes, then everything else changes. From 1983 onwards, every green bar is now positive, meaning the price of the S&P 500 was higher in inflation-adjusted terms than it was in 1980.

For the entire 20 years, every yellow bar is now negative, meaning gold was worth less in inflation-adjusted terms. As explored in more detail in Chapter 16 (link here), the actual historical relationship between gold and inflation is not at all what many people think it is.

When we compare the 1980 to 2000 secular cycle to the 1969 to 1980 secular cycle, while we do not see the commonly expected inflation protection from gold, what we do see is a complete inversion in how stocks and gold perform over the long term, which validates the very valuable contracyclical relationship between the two asset classes.

If we look at the 1980 to 2000 period, there is a very consistent secular cycle of stocks outperforming gold. There were 213 rolling two-year comparisons favoring the S&P 500 over gold over almost 20 years, and only 21 with an advantage favoring gold.

Despite its reputation as a reliable source of inflation protection, gold in fact lost 53% of its value by the time we were four years into the new secular cycle - even while the S&P 500 was slightly outperforming inflation, increasing by 7%. It was now stocks that were acting as a successful inflation hedge, even while gold was failing investors.

Over 10 years, the consistency of stock prices outperforming gold meant that stocksprices would not just keep up with inflation but would exceed it by 78% - even while gold prices fell by 61% in inflation-adjusted terms.

The consistency would continue over the next 10 years, and by the time we reach 20 years after the start of the cycle in 1980 - stock prices were up by 476%, even after adjusting for the dollar having lost 52% of its purchasing power. Meanwhile, the contracyclical asset of gold had utterly failed as an inflation hedge, losing 78% of its value in inflation-adjusted terms.

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This highly consistent rolling two-year advantage to stocks over gold over the twenty years produced an ever growing magnitude of gains for stock investors relative to gold investors. In just the first five years, an investor in the S&P 500 on a price basis would have had three times the net worth of an investor in gold.

Indeed, the magnitude of the historical swings might seem hard to believe or to be improbable - but it is just simple history. The issue is how many savers and investors are following common belief systems that they believe to be accurate but are not consistent with actual history.

Historically, an investor in gold in 1969 would have had almost five times the net worth five years later in 1974 than they would have had if they had been invested in the S&P 500. Historically, an investor in stocks in 1980 would have had more than three times the net worth five years later in 1985 than what they would have had if they had been invested in gold (and this is before dividends).

The advantage to being invested in stocks instead of gold in almost any given two year holding period would then continue for the next fifteen years. And as those consistent gains built, and built and built upon each other, the magnitude of the gains over the secular cycle kept rising as well.

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Disclosure: This analysis contains the ideas and opinions of the author. It is a ...

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